Cotton and the laws of natural selection

Long after it’s over, 2010 will be remembered as the year that separated the men from the boys in India’s cotton business. If you are smart and the right size, growing, making and selling cotton fibre and clothes has never been more lucrative.

Even a one-acre farmer in Gujarat is today earning Rs 54,600. Last year he made Rs 36,000. That’s a 50% jump in income though his field has produced only one extra quintal. And the season has not even kicked off. Large farmers that get higher yields through drip irrigation and high-tech seeds are earning in lakhs.

Big ginners and exporters are equally delighted, with an 84% jump in cotton exports worth extra Rs 300 crore. It will take deeper-than-usual pockets to buy, hold and trade 34 million tonne cotton at current prices. That clears market clutter.

Business is brisk for big spinning companies. While production is rising 4% annually, consumption is rising twice as fast. Exports are likely to double over last year and fetch Rs 1,800 crore. Cotton and yarn exports will earn India Rs 2,100 crore. Not bad.

Perched at the top of the value chain is the giant weaving and clothing industry that claims to be in the midst of a life-threatening crisis. Yet not everyone is feeling equal pain. The garment industry is worth Rs 3 lakh crore. Of this, domestic sales are Rs 2 lakh crore. Or you and I buy more than half the clothes and fabric. And we are hardly in a position to worry about expensive jeans, shirts, curtains and children’s clothes when food, travel, rent, and everything else in our shopping basket are so costly. Indeed, we aren’t even complaining.

Big players such as Aarvee Denims, Reliance Industries and Gokaldas Exports raised prices by 15% this month. World’s biggest denim maker Arvind Ltd, supplier to Levis, Lee, Wrangler, Color Plus, Killer, Arrow and Park Avenue, is now charging Rs 15/metre extra for denim that used to sell for Rs 130. Instead of baulking, we are buying more. Branded clothing sales are up by a fifth in last three months and the festival season has just begun.

Only the one-third output which is exported is troubled. Yet the situation is not dire. Apparel Export Promotion Council says shipments till end-August were just 14% lower than target. And targets are hardly cast in stone, as any parent of a teenager can tell you. Margins are under pressure because recession-hit American buyers — our biggest customers — are bargaining harder. With so many countries jostling for business, Indian exporters can’t pass on entire raw material cost. But they still have an edge because India has the world’s cheapest cotton.

Watching only the fittest survive has the government in knots. With cotton beyond control, it now wants to check yarn prices. Options include imposing an export duty on yarn by introducing count-wise tariff lines or quantitative restrictions. A group of ministers will decide what to do this week.

The big question is who would this help? The biggest players will obviously exploit cheaper yarn the most. So rather than suppressing prices, targeted schemes will go further to help powerloom weavers who can’t afford yarn today. The way BPL cards work. And though Tirupur hosiery makers are politically savvy and vocal, destroying a free market won’t resuscitate their high-cost and fragmented business. Or recover lost jobs. Consolidation and efficiency are the answer.

It will become increasingly difficult for winnows in the textile industry to survive the coming years. India’s cotton acreage is saturated but industrial capacity is expanding. Machines must replace expensive labour. Eventually only companies with strong cash flows and pricing power will be able to afford expensive cotton — local or imported — and also charge us a fancy price. This churn is never a pretty sight. Indeed, the human suffering is terrible.

We’ve seen it before. A 2,500-tonne sugar factory can never compete for cane against a 10,000-tonne factory. Tiny ‘kachi ghani kolhus’ have given way to giant refineries. Lakhs lost their livelihoods. Unless the small player compensates with extraordinary nimbleness or specialization, existence is impossible. Frantic Tamil Nadu textile industrywallahs are threatening murder at the polls if government takes away their life support. So it won’t. That only postpones the inevitable. It’s the old law of natural selection. Meanwhile, raise a toast to 2010. Cotton is the new white gold.

DISCLAIMER : Views expressed above are the author's own.

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Author

Nidhi Nath Srinivas blogs as the CEO of Ncdex Institute of Commodity Research, an independent think-tank and education body dedicated to strengthening the understanding of physical and derivative commodity markets, and fostering theeconomic and social welfare of individuals and businesses through free and transparent commodity markets. She is also Chief Marketing Officer at Ncdex, the leading national commodity exchange. Previously, she worked in The Economic Times as the Commodities Editor. The views are personal.